Home » Non-Fungible Tokens (NFTs): Definition and Mechanics

Non-Fungible Tokens (NFTs): Definition and Mechanics

by FX BrokerNews

Ever since pictures of apes were sold for millions of dollars, people have been asking: what are NFTs? Here we’ll tell you all there is to know about NFTs.

So what is an NFT?

NFT stands for Non-Fungible Token.

The term “non-fungible” signifies that each token is distinct and cannot be replicated identically, as there is no identical counterpart. NFTs are inherently unique.

To illustrate, fungible assets like cash or Bitcoin are interchangeable because each unit is identical and can be used interchangeably. Conversely, a unique collectible trading card is non-fungible. If exchanged for another card, the replacement is entirely different.

Similarly, NFTs are singular, with no two tokens being identical, rendering them non-fungible. While they can be traded, each transaction results in a distinct NFT.

Are they the same as cryptocurrencies?

It’s a common misconception considering both NFTs and cryptocurrencies are stored on the blockchain.

As mentioned earlier, the key distinction lies in fungibility: cryptocurrencies are fungible, while NFTs are non-fungible. Additionally, cryptocurrencies can be subdivided into smaller units, enabling fractional trading. Conversely, NFTs cannot be divided and must be traded as complete entities.

So how do NFTs work?

Although various blockchains support non-fungible tokens, Ethereum stands out as the most prominent. Ethereum (ETH) functions as both a cryptocurrency, akin to Bitcoin (BTC), and a blockchain that records ownership and transactions of NFTs.

NFTs on Ethereum are typically built according to the ERC-1155 standard. Initially, they adhered to the ERC-721 standard, but the introduction of ERC-1155 refined the process and reduced transaction costs.

As reiterated earlier, NFTs are distinct and cannot be replicated. While the digital files associated with these tokens can be duplicated, ownership of the authentic work cannot be counterfeited.

To illustrate, consider collectible fine art. You and your acquaintances may possess copies of the Mona Lisa in your homes, but the genuine masterpiece resides in the Louvre museum in Paris. Similarly, while anyone can duplicate the digital file linked to an NFT, there exists only one original.

What can be NFT-ized, and where did they come from?

While digital art garners significant attention within the realm of NFTs, these tokens have a broad scope encompassing various digital assets. Platforms like OpenSea, a popular NFT marketplace, host a diverse array of categories including music, photography, trading cards, and more.

In a notable instance, Twitter co-founder Jack Dorsey auctioned his inaugural tweet from 2006 as an NFT in 2021, fetching a staggering $2.9 million.

Fundamentally, an NFT serves as a tool for establishing ownership, extending its utility beyond digital art to encompass various applications such as owning in-game assets within the metaverse. Notably, NFTs are employed to possess virtual real estate in Web3 games like Wolf Game and Decentraland. Blockchain proponents envision a future where NFTs could potentially be utilized to validate ownership of physical real estate in the tangible world.

Despite their recent surge in popularity, NFTs have existed for nearly a decade. Many attribute the inception of NFTs to Kevin McCoy’s digital artwork titled “Quantum,” which was tokenized on the Namecoin blockchain in May 2014.

How are they created?

The creation process of a non-fungible token is referred to as minting. During minting, the pertinent information of the digital file is encrypted and stored on a blockchain.

Numerous online platforms facilitate the minting of non-fungible tokens, with many also offering features for listing and selling your creations.

OpenSea stands out as the premier platform for Ethereum-based NFTs. Since its inception in 2017, the platform has listed millions of NFTs and has facilitated billions of dollars in trading volume.

Why do they matter?

NFTs offer artists and creators a global platform to sell their digital creations without relying on traditional intermediaries like auction houses or galleries, which often restrict audience reach and claim a significant portion of the proceeds from sales.

Some marketplaces even enable artists to set royalties for their digital artwork, ensuring they receive a percentage each time the NFT changes hands. Notably, celebrities like William Shatner, known for his role as Captain Kirk in Star Trek, utilize this feature to generate passive income.

For collectors and gamers, NFTs grant immutable ownership of digital assets, ranging from unique costumes for digital avatars to virtual land or structures in the digital realm. Additionally, these tokens can serve as speculative assets, allowing investors to purchase and hold them with the hope of realizing a profit through future price appreciation.

Is anyone besides individuals using NFTs?

Indeed, a few years back, numerous brands incorporated NFTs into their marketing campaigns, leveraging these tokens as an innovative avenue to interact with their audiences.

For instance, Taco Bell, the renowned fast-food chain, curated a series of artworks titled NFT Taco Art, drawing inspiration from their signature tacos. Likewise, TIME magazine ventured into the NFT space by creating and auctioning several of their most iconic covers as non-fungible tokens.

McDonalds, too, used them to boost engagement. Instead of auctioning NFTs to the highest bidder, the fast-food chain offered them as prizes in a competition. 

French car maker Citroën created NFTs of their cars, which owners can use to race in the Riot Racers game. 

Are they safe?

NFTs boast robust security measures, making them highly resistant to hacking attempts. However, akin to cryptocurrencies, the vulnerability lies in safeguarding the cryptographic keys. The adage “not your keys, not your coin” applies to NFTs, emphasizing the importance of securing one’s keys to protect their NFTs from potential threats. Nevertheless, devices housing these keys can be susceptible to theft, loss, or damage.

Despite their security features, scams remain a concern in the NFT space. One common scam involves duplicating an already tokenized digital asset and minting another NFT for it. However, this results in a counterfeit rather than the authentic original, constituting one of the prevalent fraudulent practices.

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